Cash-Strapped States Labor to Fund Jobless Benefits

The latest jobs reading showed the U.S. unemployment rate holding steady at 9.7 percent in March despite positive news that employers added 162,000 jobs. But with 20 million Americans collecting jobless benefits last year from already cash-strapped states, unemployment insurance systems around the country are stretched to their breaking points.

OLGA PIERCE: My overall assessment is that it’s not good. So far, 32 states plus the Virgin Islands have insolvent funds. They are essentially borrowing from the federal government to keep paying checks. So, far they have borrowed $37 billion.

There are a few different kinds of states – we talk about ants and grasshopper states, like in the children’s fable. There are some states that kept their systems extremely underfunded for years and entered the recession in trouble – and then essentially folded when unemployment increased. Those were the first crop of states to borrow. A good example of that is New York. Under federal law, even before the recession, states could borrow interest-free for a year. New York would borrow money every year and pay back at the last minute interest-free. So when the recession hit, they had nothing to draw on.

Other states — Kansas, for example — had relatively good reserves, but the unemployment increase was so unprecedented they burned through the reserves. So in some states, this was a long time in the making, but other states are victims of the recession.

Which states are in the best and worst shape?

OLGA PIERCE: There are a few states in great shape. Washington state has more than $2 billion in its trust fund and we project they will be completely fine through the end of the recession. A lot of that has to do with progressive tax policies and high reserves going into the recession. Oregon is also in good shape, not as good as Washington, but for similar reasons.

The runaway “winner” [for worst shape] is California, which has borrowed $8 billion. There was a stretch of time last year when they were borrowing $30 million a day to pay unemployment benefits. By the end of the recession, it’s projected they will have borrowed $15 billion.

The stimulus bill extended the interest-free grace period for states to borrow money – they have until the beginning of 2011 to start paying this money back – but there is no way California can pay that back by then. And the federal government will charge interest – probably between 4 and 5 percent. So that’s hundreds of millions of dollars a year just on interest. And the way the rules work is you cannot pay interest from unemployment insurance taxes – it has to come out of state budgets.

There are some states that kept their systems extremely underfunded for years and entered the recession in trouble -- and then essentially folded when unemployment increased.Olga Pierce, ProPublica

The next tier is the $2 billion club – and that’s states like Pennsylvania, Ohio, North Carolina, New York and Michigan. They have all borrowed more than $2 billion – Michigan is actually pushing $4 billion, but their trust fund has been in trouble even before the recession because of high unemployment there.

How do unemployment benefits differ by state?

OLGA PIERCE: States have wide latitude to set benefit levels; some states are generous, others less so. [Trust funds in] Louisiana and Mississippi are in good shape, but they have pretty restrictive eligibility standards. Their benefit level average is also below the national norm. The top-paying states pay more than twice the bottom states per week. Mississippi is 51 out of 51 nationwide and they pay $195 per week. By comparison, Hawaii is 1 out of 51 and they pay $419 per week.

So, depending on where you live, you might get a lot more money than elsewhere. We thought it was related to cost of living, but we find it isn’t that correlated. It has a lot to do with states’ attitudes toward social insurance. A lot has to do with historical balance of union power versus chambers of commerce. Unemployment insurance is only really sexy when there is a crisis. It tends to be decided in the subcommittee of a subcommittee of a subcommittee. The people who show up to the subcommittee meetings tend to be the business owners who pay unemployment insurance tax. So a very technical change that is little noticed at the time can blow up later.

Have states changed rules in reaction?

OLGA PIERCE: Already for this year, 36 states have raised their unemployment insurance taxes, which has a very direct effect on business owners. In some cases, the increase was several fold. And that also has an indirect effect on workers. If it costs more to hire you, they might not hire.

We also see states making moves to reduce benefits or restrict eligibility. In Pennsylvania, everyone in the first 26 weeks of benefits got a 2.3 percent benefit cut. If the average benefit is $300 a week, it’s not a huge cut, but it’s a utility bill or a few more groceries.

Virginia cut unemployment insurance for seniors who also collect Social Security, based on an obscure clause in state law [that kicked in] when the trust fund ran in to trouble. One man I spoke to was getting $800 a month and it was cut to $100 a month.

Indiana has started a system where if you turn down a job, even if it pays a lot less than what you were making, they start cutting your benefits. And they will cut it up to a 43 percent if you turn down multiple jobs.

So, taxes have already gone up. There is a limit to how much you want to increase taxes, because that can exacerbate unemployment. I think there will be more pressure on states to look at the benefit side of the equation. I don’t see a state not mailing out benefit checks, but there will be way to wheedle things out, either benefits or who gets benefits.

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